Sales of Existing Homes Firm Up A Bit In August - September 21, 2011

The economy received a rare piece of good news this morning, and from all places, the troubled housing market. Specifically, the National Association of Realtors, a trade group, issued data showing that sales of existing homes rose in August to their highest level in five months.

Of course, when taken on an absolute basis, the aggregate level of such monthly sales was still very low, being well under the levels in place a half decade ago. In all, such sales increased by 7.7% last month, climbing to an annual rate of 5.03 million homes. This upbeat report runs counter to both the decline in housing starts posted for August yesterday, and expectations of a flat-to-lower metric in this category. Meanwhile, the July total was unrevised at 4.67 million units.

According to the aforementioned trade group, the increase in August sales resulted largely from closings that had been bogged down earlier, in part because it is taking longer for some buyers to secure mortgages. Also, appraisals, which earlier in the cycle might have taken a few days to receive, are now often taking weeks, which also frustrates the conclusion of some deals. Also, weak appraisals can scuttle deals or lead to painful and drawn out selling price revisions. Some appraisers, who had been overly lenient earlier when this sector was flourishing, may now, in some cases, being unrealistically tough in their more recent price evaluations.

At the same time that heretofore bogged down deals were closing, the number of cancellations remained uncomfortably high. This survey of realtors found that fully 18% of people who had signed contracts pulled out of such deals last month--even though in some cases that could mean the loss of up to 10% of the purchase price, which is often the qualifier for securing a signed contract.

Also, the median price of a sale was $168,300, which was down 5.1% from the $177,300 median price seen a year earlier, suggesting that foreclosures were playing an increasing role. Indeed, the percentage of homes sold that were categorized as distressed--including foreclosures--rose to 31% last month from 29% in July. Moreover, investors accounted for 22% of overall sales, up from 18% in July and 21% in August of last year. This may suggest that the low prices still in effect are attracting new speculators. The high level of investor buying is keeping all-cash deals at a high 29% of total sales.

Finally, in another piece of good news, the total housing inventory at the end of August fell 3.0%, to 3.58 million existing homes. That represents an 8.5-month supply at the current sales pace, which is down from July's 9.5-month supply. Until we see that metric fall, and we may be seeing the start of that now, we think it will be hard to fashion a durable recovery in this battered sector. So, all in all, it was a somewhat better report on a comparative basis, although the industry remains bogged down in an extended slump from a historical perspective.

At the time of this article's writing, the author did not have positions in any companies mentioned.